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Imf Raises Spectre Of Uk House Price Correction


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IMF raises spectre of UK house price correction

By Edmund Conway, Economics Editor in Washington DC

Last Updated: 3:46pm BST 17/10/2007

Britain is facing the prospect of house price declines as severe as those suffered in the US following the crisis in the sub-prime mortgage lending, the International Monetary Fund has warned.

The Washington-based fund identified the UK as among the most susceptible economies in Europe to a housing market correction.

IMF warns of house price correction

"Housing markets have boomed in a number of fast-growing economies, most notably Ireland, Spain, and the United Kingdom, with rapid price rises and sharp increases in residential investment relative to GDP [gross domestic product] exceeding even those observed during the US housing boom," the IMF said in its closely-watched world economic outlook.

"Given that rapid increases in some countries have raised concerns about possible excesses, some cooling seems desirable, if it does not go too far too fast. But could a housing correction in western Europe be as deep as in the United States? [Our analysis] suggests that the extent of house price overvaluation may be considerably larger in some national markets in Europe than in the United States, and there would clearly be a sizable impact on the housing markets in the event of a widespread credit crunch."

The warning will raise fears that the market in the UK, where a surge in house prices has turned many families into property millionaires, could follow the US, where home values are falling fast in many parts of the country and the wider economy is suffering.

Household wealth has more than doubled in the past decade but that growth looks to be coming to an end, with consequences for the British economy.

advertisementThe IMF today cut its forecast for the United Kingdom's growth next year by 0.4 percentage points to 2.3pc. It reduced its expectation for global growth by the same amount to 4.8pc, blaming the credit crisis which is still causing shockwaves in markets and households throughout the world.

A full half of world economic growth this year will come from China, India and Russia, it added.

It said its forecast assumed that markets gradually returned to normal in the coming months, with debt prices settling back down after a torrid summer.

"Nonetheless, there remains a distinct possibility that turbulent financial market conditions could continue for some time," it added.

"An extended period of tight credit conditions could have a significant dampening impact on growth, particularly through the effect on housing markets in the United States and some European countries."

The IMF also said central banks, including the Bank of England, should re-examine the way they provide liquidity to the markets, following the recent credit crunch, which some have blamed on central banks' policies.

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